Paying Your Kids

• When you own an in-home business, you may need help with some basic business tasks. Instead of handling this yourself, hire your children to do it for you. Child labor laws do not apply when you are hiring your own children. You then pay your kids a regular wage for the work they do and this shifts income from you to the child.
  
  

Self-Employment Taxes

• When you work as a self-employed individual, you have to pay self-employment tax to the IRS. This amounts to paying for Social Security taxes and Medicare taxes. When you pay your kids, you do not have to pay Social Security taxes on the amount of money you pay them. This allows you to lower your business income and avoid paying these self-employment taxes on the amount of money you pay your kids.
  
  

Keeping Records

• When you want to deduct the amount of money you pay your kids, make sure you keep detailed records. Your kids must keep track of their hours on a time card or in a log book. You also need to write down exactly what they are doing. At the end of the year, you will need to issue your child a W-2 to show the total amount you paid them.
  
  

Type of Business

• To take advantage of all of the tax savings that come with this strategy, you have to have a sole proprietorship or a partnership with your spouse. If your business is set up as a C corporation or as an S corporation, you will have to pay payroll taxes on your kids regardless of how old they are. If you are a sole proprietorship, you can pay your child and they may not have to pay any taxes on the money because it might be under the standard deduction.